posted by Curt, on November 17, 2008 09:49 am

I'm not the only one who has noticed how Obama's recent actions seem to be mimicking Lincoln's (as described by Doris Kearns-Goodwin in her bestseller Team of Rivals: The Political Genius of Abraham Lincoln).

Jacob Heilbrunn: Obama's Team of Rivals

Obama's 'Team of Rivals' Approach Could Mirror That of Abraham Lincoln

Obama may keep rivals close -- chicagotribune.com

And so I doubt it is a coincidence that Team of Rivals has returned to the Amazon.com bestseller list, weighing in all the way up there at #12.

Let's hope Obama has read Kearns-Goodwin's book carefully. Because, if he has, he'll realize that assembling the Team of Rivals is the easiest part of such an approach. The key to the success of Lincoln's cabinet (and also the secret to his "political genius") was his ability to make it work. Can Obama do the same? It's obvious that he's trying.

And he should get credit for that.

posted by Curt, on October 17, 2008 07:48 am

The causes of our current financial crisis have been discussed ad naseum these days. Lots of the talking heads you see on T.V. or the opinion leaders you read online are now admitting what many of them ignored during the credit boom years: that these problems are all a result of years and years of ridiculously loose credit policies, practices, and irresponsible borrowing. In an even more remarkable acknowledgment of the failure of the credit and consumption creed, many are even admitting that the U.S. economy needs to wean itself off of credit. But, even with this acknowledgment, these individuals, almost to a man still support massive (and continued) government intervention. Why? Because, according to them, quick deleveraging (i.e. debt destruction) would be disastrous for the economy. We need government intervention, they say, to ensure orderly deleveraging of the debt--otherwise we'll be plunged into another Great Depression.

Putting aside the question of whether "orderly deleveraging" is just another phrase for prolonged economic pain, one might well ask himself whether it is moral, or even possible, to have manic, highly leveraged growth on the way up and orderly deleveraging on its way down? Latching on to the assumption that economics really is a "science," applicable laws would suggest that an equal and opposite reaction is required for recovery. I have my doubts that we can have a period of orderly deleveraging that lets us all down slowly from the highs of our 30-year credit binge. But our fearless economic leaders are certainly giving it the old college try. I just don't think they'll succeed. If the idea of skyrocket up and float softly down isn't clearly contrary to the laws of economics, it certainly seems contrary to the Law of the Harvest.

Since we're not willing to boom and bust, probably can't boom and deleverage orderly without pain, I suppose we're left with the choice to try and regulate bubbles out of existence. But, knowing the little I do about human nature, I'm pretty convinced that won't work either.

posted by Curt, on October 13, 2008 10:22 am

The world's governments have gotten together and somehow managed to guarantee everything. No bank or major company will be allowed to fail during the next year, and they'll hand out as much money as the world's banks want to take on. Nobody is really sure where all the money is going to come from in order to do this. But that's irrelevant at this point since the stock market is rising (for now).

The FASB now allows banks and other companies holding mortgage-backed securities to value those assets at whatever they think they are worth (they can "use their own judgment"), therefore making the problem balance sheets just disappear before our eyes.

Pelosi is angling for yet another stimulus package, proving that her leadership response to an economic crisis is to hand out $150 billion in "free" money once every four months until the economy improves. And only a couple of our representatives from either party will even try to oppose her.

Obama and McCain are falling over themselves to try and be the most generous with money that they don't have, both insisting that they can continue to increase spending while guaranteeing mortgages, keeping bankrupt Americans in "their" homes, and offering tax breaks to millions.

General Motors is on the brink of failure and is considering merging with one of two other American automakers that are also on the brink of failure. And boy oh boy is the market cheering it all.

The icing on the cake is that our leaders are actually patting themselves on the back??!!

As much as I say that nothing will surprise me anymore, I am surprised at the speed and joy with which we are sowing the final seeds of our own financial destruction (most of it has already been assured, but, believe it or not, this can make things much worse).

As a fellow online commenter said, this has reached the point of complete madness. In years to come, people will look back at this crisis and just shake their heads at our response. It's more than ridiculous.

posted by Curt, on October 8, 2008 07:04 am

Wikipipedia defines The Law of Unintended Consequences as follows:

The "law of unintended consequences" (also called the "law of unforeseen consequences") states that any purposeful action will produce some unintended consequences. A classic example is a bypass — a road built to relieve traffic congestion on a congested road — that attracts new development and with it more traffic, resulting in two congested streets instead of one.

This maxim is not a scientific law; it is more in line with Murphy's law as a warning against the hubristic belief that humans can fully control the world around them. Stated in other words, each cause has more than one effect, and these effects will invariably include at least one unforeseen side effect. The unintended side effect can potentially be more significant than any of the intended effects.

The law seems to be in full operation regarding the U.S. government's recent efforts to stabilize the economy. In order to build support for the bailout, Bush, Paulson, Bernanke, and Congress all told people that the world was going to end if they didn't act immediately. We'll never know what would have happened without the bailout, though I believe that the consequences of not acting probably would have been severe.

But what it seems clear that the government's actions have done is caused an even greater general financial panic. When the bailout didn't work immediately, people panicked even more. And now, it seems that any further government action on the economy simply convinces people that their panic is justified. All this results in people pulling their money out of the stock market, and, perhaps more importantly, hunkering down and refusing to spend--maybe accelerating the move of the problems from "Wall Street" to "Main Street." At this point, you really have to wonder how much control the government retains over the whole situation. Ironically, it's numerous attempts to control the situation may have resulted in the economy being more out of control that it might otherwise be. How significant this potential unintended consequence is, in relation to the alternative, still remains to be seen.

Now, Bernanke and Paulson are smart guys. They know that their actions will have unintended consequences, and I think they weigh the potential benefits of each decision against its potential costs (e.g. growth potential v. inflation potential for a rate cut). But I wonder about the extent to which they fully considered the potential psychological impacts of their actions, and the resulting impact that mass fear mobilization could have on their ability to retain whatever level of control they had over the course of the U.S. economy.

Now no one can foresee all the consequences of their actions. It's obvious that just because your actions may result in something happening that you don't expect you shouldn't quit acting altogether. But the government response to this crisis may provide yet more evidence that it is not always better to "do something, anything now" as opposed to waiting to do something better later.

posted by Curt, on September 23, 2008 10:11 pm

I'm taking a break from bailout ranting today ;)

Harry Truman was poor all his life. He held state political positions that others got rich from, but he refused to take any money. He went to Washington, D.C. as a Senator and arrived there broke. He stayed broke as a Senator and didn't even have much extra money while he was President. And when he had served his second term he left Washington without money or a job, only a meager army pension from his service in WWI. He was direct, honest, and principled. And he was considerate and kind. We could sure use one like him now, and Washington probably hasn't seen another like him since he left. In many ways he was one of a kind. Of was he?

I happen to think there are, and always have been, quite a few Harry Trumans around this country and other places (and he would, too). But they rarely arrive in Washington, and that's what makes Truman's story so fascinating.

How in the world does a Truman get to Washington while remaining a Truman? Well, his story is written down for anyone to read, and it is really remarkable. But a story like it only happens rarely. People like Harry Truman are usually either weeded out by the political king-makers. Or, if they survive that gauntlet, they generally self-select themselves out of the political business. In order for a Truman to end up to where a Truman got to, it takes a happy historical accident and an unusual commitment to politics combined together in a man or woman of (otherwise?) sterling character.

And, ironically, that person's commitment to politics is probably significantly selfish. I doubt very much if it is completely altruistic, since it takes a tremendous ego to believe that you are the best qualified person to solve a state's or a nation's problems. I'm convinced that altruism is definitely a factor but I would guess that another primary motivating factor for most Truman-like politicians (and there aren't many) is a desire for influence and recognition. And, ultimately, this is a selfish motivation. Perhaps the reasons that the Trumans are as rare as they are is because, generally speaking, persons of that character are unwilling to impose the costs of high level politics on their families for what they suspect, deep down, to be a selfish desire. And the cost of political influence imposed on that person's family is often very real. When a person of that character is faced with a choice between country and home, fellow-citizens and family, I would think they would be most likely to keep close to home.

I'm not saying that a politician always has to choose between family and political influence; but that seems to be the reality in many cases. And I'm sure that the Trumans of the world are aware of the world's realities. I'm sure that, at the least, they realize they are faced with a choice between significant risk to family on the one hand, and one type, albeit a very influential one, of service to country on the other. That must be a hard choice to make for an honest, principled, and considerate person. And if the cost of another Truman in the White House is that man or woman's family, I'm not sure whether I want one there or not. Maybe they are best left back in Independence. It seems like we can get along--though not as well as we otherwise might--without them in Washington, but America might not be able to get along without them at home.

posted by Curt, on September 20, 2008 08:48 am

I've recently been working my way through James McPherson's outstanding history of the Civil War, Battle Cry of Freedom. As you would expect a comprehensive treatment to do, the book begins by focusing on the years leading up to the Civil War, beginning with the end of the Mexican-American War in the 1840s. As part of his introductory history, McPherson discusses the elections in 1848, 1852, 1856, and 1860. Lincoln was, of course, elected in 1860 and was the first President elected from the newly-formed Republican Party. The Republican Party replaced the Whig party, which was, ultimately, destroyed by the crisis over slavery.

We've had no major party "births" or "deaths" in the last 150 years. There is always talk about forming a third party, of course. But, historically, that doesn't generally seem to be what happens. Instead, once in a blue moon, you get the death of one party and the emergence of a new one. Both of the current parties have survived through the Great Depression, World Wars 1 & II, Vietnam, and Iraq. They also survived the Great Inflation of the 1970s and early 1980s as well as the Cold and Korean Wars. All this makes me wonder, what is it that causes a party to die and be replaced by another one? And is there any possibility that a new party could be born out of the current financial crisis?

I'll have to do a lot more thinking about this. But I'd appreciate any thoughts (or directions on some reading I could do).

posted by Curt, on September 19, 2008 06:50 am

Up to now, I've been very outspoken, in an online sort of way, in saying that our own overconsumption is to blame for this credit crisis. I still maintain that. But we are not to blame for the government's irresponsible and unfair bailout response. That's all on the policymakers, who felt they had to "protect" the economy in an election year by putting everything on the back of the taxpayers without so much as even asking about it.

And now they've banned short-selling in the market, given a government guarantee to every Wall Street corporation and the market is surging--All on the back of the American taxpayer and his children. While it's generally an overused phrase, this is an outrage.

If the government is going to take this course, THESE MANIPULATED MARKETS SHOULD BE SHUT DOWN! No one should be trading now.

posted by Curt, on September 17, 2008 07:14 am

No news flash here: we live in a nation that rewards consumption and penalizes saving. You get tax breaks from buying things, not from staying prudent. Interest rates are so low that the return on money in a savings account is outstripped by the rate of inflation, so that you lose money you don't spend or invest.

Why do we do this to ourselves? Because it's been an article of faith that encouraging consumption "grows" the economy.

Well, now seems about as good a time as any to question this holy tenet of economics. Consumption grows the economy in the sense that the numbers get bigger and there are more economic transactions (which do put people to work). But it appears that this growth can come with an unacceptable cost. The growth is imbalanced. It doesn't reflect any actual production or contribution. It's like a big ponzi scheme. We're just told that, as long as we keep spending, everything will continue OK. Doesn't that sound MLM to you? That's not how an economy is supposed to be, is it? Perhaps I'm showing my ignorance here. But that appears to be were the "consumption should always increase" article of faith has got us.

Right now, we're seeing the fruits of all the consumption incentives of the last 30 years. Surprise of surprises, it seems it is possible to over-consume to such a point that the risks far outweigh the rewards. In the best of worlds, the American people would come to this realization on their own. But, if they can't or won't realize what's causing the current crisis, it seems we need to change the incentive structure.

Consumption is good, and economically beneficial. But a headlong consuming rush "grows" the economy on a sandy foundation, and when that over-inflated piece of credit begins to topple, great is the fall of it.

Oh, and I can't talk about AIG. I'm so mad that I've almost been rendered dysfunctional. But I'll recover.

posted by Curt, on September 9, 2008 12:44 am

The long anticipated bailout is now a reality. Most commentators now agree that the American taxpayer (really meaning the younger American taxpayer and his children) have now been saddled with some unknown billions in bad mortgage debt. A great number, especially here in Utah, are predicting the end of the United States as we know it. According to them, we're following Europe into the dark abyss of socialism (never mind that we've really been there for years already).

I just can't get too worked up about this one. Maybe it's because I'm worn out. Maybe it's because I'm happily settled in a nice, rented home in a good neighborhood and so I don't really feel a need to confront the housing market right now. Or maybe it's because, as repugnant as it seems, there's a lot of truth in the idea that the bailout was necessary in order to "save the economy." Trust me, I know that I'm affected. But, what can we do about it really? There is no candidate out there who will exercise anything remotely close to fiscal discipline. And most of us would try to string them up if they tried. It's not good for me to get worked up about it over and over again. I just can't feel continual passion and outrage over each continuous development once I have a good idea of the route we're going down. I'll write-in Ron Paul as my protest vote in this election and continue to advocate for fiscal restraint at the household level. That's about all I can do. But, even though I'm not worked up about the Mother of All Bailouts So Far, I remain an intensely interested bystander.

It seems to me that we have the US government putting all its resources into preventing a paradigm shift. What we have is a long line of credit excesses and the government is putting its full resources behind a broken system to try and keep it going as long as it can. I'm curious: how much longer can they prop it up? What we're seeing in the response to this economic crisis is the testing of the economic assumption of the last 30 years--we can always spend more because we're the USA; you're investments in us our safe, because the government will always make good. Now the government's trying to come through on its promise in a world that is remarkably different than the one in which the paradigm was developed. Can it do it? My own opinion is that it probably cannot. The real question for me is how long can it keep plugging holes in the dike? Everyone in Washington seems committed to doing it. So, we're in for the long haul, and the Fannie and Freddie bailout is just another step along what promises to be a most interesting road.

I suppose that all this sounds incredibly pessimistic. And I guess it is, generally. But I'm not a complete pessimist (although perhaps a bit over-realistic). I don't believe this economic crisis spells doom for America, so long as a significant number of people realize that the end-all be-all of life isn't new things. And I have confidence that they will, although it will be a painful proposition. As painful as it is all going to be, it should be a fascinating journey with many important lessons learned.

posted by Curt, on July 13, 2008 04:30 pm

It's been a long time since I've posted one of these "influences" posts. This one was prompted by a paper written by a law school friend on Patrick Henry, national power, and the War Powers Resolution. His paper wasn't focused on Henry's well-known speech (which follows below). Instead, it focused on his arguments about the danger of consolidation of power, and suggested that they remained a good guide for us today. Essentially, he argued that the Anti-Federalists and their arguments shouldn't be consigned to history simply because they lost the battle over the ratification of the Constitution. I agree. But, this post is more about Henry's speech than the Anti-Federalists, because it has influenced me ever since I was a kid and my mom read to us about Patrick Henry in a bedtime story. That's how I fell asleep for quite a few years--to biographies of famous historical figures, and I'll be ever grateful for it.

In any event here's Patrick Henry's speech. My commentary follows:

No man thinks more highly than I do of the patriotism, as well as abilities, of the very worthy gentlemen who have just addressed the House. But different men often see the same subject in different lights; and, therefore, I hope it will not be thought disrespectful to those gentlemen if, entertaining as I do opinions of a character very opposite to theirs, I shall speak forth my sentiments freely and without reserve. This is no time for ceremony. The questing before the House is one of awful moment to this country. For my own part, I consider it as nothing less than a question of freedom or slavery; and in proportion to the magnitude of the subject ought to be the freedom of the debate. It is only in this way that we can hope to arrive at truth, and fulfill the great responsibility which we hold to God and our country. Should I keep back my opinions at such a time, through fear of giving offense, I should consider myself as guilty of treason towards my country, and of an act of disloyalty toward the Majesty of Heaven, which I revere above all earthly kings.

Mr. President, it is natural to man to indulge in the illusions of hope. We are apt to shut our eyes against a painful truth, and listen to the song of that siren till she transforms us into beasts. Is this the part of wise men, engaged in a great and arduous struggle for liberty? Are we disposed to be of the number of those who, having eyes, see not, and, having ears, hear not, the things which so nearly concern their temporal salvation? For my part, whatever anguish of spirit it may cost, I am willing to know the whole truth; to know the worst, and to provide for it.

I have but one lamp by which my feet are guided, and that is the lamp of experience. I know of no way of judging of the future but by the past. And judging by the past, I wish to know what there has been in the conduct of the British ministry for the last ten years to justify those hopes with which gentlemen have been pleased to solace themselves and the House. Is it that insidious smile with which our petition has been lately received? Trust it not, sir; it will prove a snare to your feet. Suffer not yourselves to be betrayed with a kiss. Ask yourselves how this gracious reception of our petition comports with those warlike preparations which cover our waters and darken our land. Are fleets and armies necessary to a work of love and reconciliation? Have we shown ourselves so unwilling to be reconciled that force must be called in to win back our love? Let us not deceive ourselves, sir. These are the implements of war and subjugation; the last arguments to which kings resort. I ask gentlemen, sir, what means this martial array, if its purpose be not to force us to submission? Can gentlemen assign any other possible motive for it? Has Great Britain any enemy, in this quarter of the world, to call for all this accumulation of navies and armies? No, sir, she has none. They are meant for us: they can be meant for no other. They are sent over to bind and rivet upon us those chains which the British ministry have been so long forging. And what have we to oppose to them?

Shall we try argument? Sir, we have been trying that for the last ten years. Have we anything new to offer upon the subject? Nothing. We have held the subject up in every light of which it is capable; but it has been all in vain. Shall we resort to entreaty and humble supplication? What terms shall we find which have not been already exhausted? Let us not, I beseech you, sir, deceive ourselves. Sir, we have done everything that could be done to avert the storm which is now coming on. We have petitioned; we have remonstrated; we have supplicated; we have prostrated ourselves before the throne, and have implored its interposition to arrest the tyrannical hands of the ministry and Parliament. Our petitions have been slighted; our remonstrances have produced additional violence and insult; our supplications have been disregarded; and we have been spurned, with contempt, from the foot of the throne! In vain, after these things, may we indulge the fond hope of peace and reconciliation. There is no longer any room for hope. If we wish to be free--if we mean to preserve inviolate those inestimable privileges for which we have been so long contending--if we mean not basely to abandon the noble struggle in which we have been so long engaged, and which we have pledged ourselves never to abandon until the glorious object of our contest shall be obtained--we must fight! I repeat it, sir, we must fight! An appeal to arms and to the God of hosts is all that is left us!

They tell us, sir, that we are weak; unable to cope with so formidable an adversary. But when shall we be stronger? Will it be the next week, or the next year? Will it be when we are totally disarmed, and when a British guard shall be stationed in every house? Shall we gather strength by irresolution and inaction? Shall we acquire the means of effectual resistance by lying supinely on our backs and hugging the delusive phantom of hope, until our enemies shall have bound us hand and foot? Sir, we are not weak if we make a proper use of those means which the God of nature hath placed in our power. The millions of people, armed in the holy cause of liberty, and in such a country as that which we possess, are invincible by any force which our enemy can send against us. Besides, sir, we shall not fight our battles alone. There is a just God who presides over the destinies of nations, and who will raise up friends to fight our battles for us. The battle, sir, is not to the strong alone; it is to the vigilant, the active, the brave. Besides, sir, we have no election. If we were base enough to desire it, it is now too late to retire from the contest. There is no retreat but in submission and slavery! Our chains are forged! Their clanking may be heard on the plains of Boston! The war is inevitable -- and let it come! I repeat it, sir, let it come.

It is in vain, sir, to extenuate the matter. Gentlemen may cry, Peace, Peace--but there is no peace. The war is actually begun! The next gale that sweeps from the north will bring to our ears the clash of resounding arms! Our brethren are already in the field! Why stand we here idle? What is it that gentlemen wish? What would they have? Is life so dear, or peace so sweet, as to be purchased at the price of chains and slavery? Forbid it, Almighty God! I know not what course others may take; but as for me, give me liberty or give me death!

With due respect to both Roosevelts, Kennedy, Reagan, and even Lincoln, I doubt there is any other piece of American political rhetoric more inspiring. And it's been adopted as part of the American psyche.

But what does it really mean for America and Americans? Many look at our country today and would say that we have chosen life and peace over freedom and liberty. Granite countertops, big trucks, walk-in closets, fast food, and conspicuous consumption seem much more the vision and goals of the American future than does liberty. Perhaps, then, the words of Patrick Henry have become yet one more part of the vast list of contradictions between the way Americans view themselves and the way they actually are. Maybe there is little spirit left in our country, especially as compared to 1776, 1861, or 1941.

I actually don't think that is the case. If Americans of the past were always willing to make the difficult choice of liberty over security, why was there a need for Patrick Henry and Thomas Paine? The reality of our history seems to be that we always need a bit of prodding to take on the difficult tasks that must be completed to secure the liberty and unity of our nation. In other words, we don't like to make the choice between liberty and security until we're really forced to. That to me, seems to be the reality of the American experience. In 1776, 1861, and 1941, no less than today, Americans needed some prodding before they were willing to stand up and save the Union and preserve their liberties. And, in significant ways, it was rhetoric that called to memory America's vision of itself that moved Americans to action. It strikes me that one of the things that Patrick Henry's speech stands for is Americans' susceptibility to ideas--big ideas about the fact that they are still engaged in the cause for which their forefathers immigrated, fought, and worked. And when there is a combination of exigency and a person with the passion and skill to call those ideas to the forefront of America's mind and heart, we still respond in largely the same way that we did back in 1776. At such times, when we are forced to see the whole picture, to "know the worst," as Henry put it, we respond with our best. I have hope that it will continue. Simply because we're not convinced that it will doesn't mean that it won't. Not even Henry knew how those listening to him would respond to the challenge he issued. He couldn't know, and neither can we. But he had faith, as do I, that, when the challenged is issued in a way that Americans respond to, it will be met by the best that America can give.

So, Henry's speech is moving to me, both as a statement of what I believe and a statement about my country--about its virtues and faults. So much for my patriotic posting. I'd appreciate your thoughts.

posted by Curt, on July 11, 2008 05:25 pm

A few months ago, people were debating about whether the US economy was really in recession. It looked like, perhaps, the Federal Reserve had staved off financial collapse and that, even with the demise of their "housing ATMs," the American consumer was still spending enough to get the economy through its rough patch with minimal or stagnant growth. In addition, increasing US exports (fueled by the weak dollar) were propping up American industry, inflation was moderate (so we were told), oil was rising, but not yet out of control, and the government was getting ready to hand out checks via its stimulus package. Even though the housing news was bad, the economic situation didn't look extremely dire--in fact, it looked better than it did in other recessions, which seemed to get much less press.

It seems as though the debate is now over. The lack of the "traditional" bad economic news (i.e. hundreds of thousands of job losses), instead of showing that the economy was withstanding the housing bubble, really just betrayed this as what it is--a different kind of economic crisis: one not based so much on the cyclical economic cycle, but one rooted in the continuous abuse of credit and debt leveraging by both American businesses and consumers. This is a collapse of a system, not a normal downturn within the system. These collapses build up slowly and occur with relatively little warning (at least to those who aren't paying attention). I think people have sensed that this is what is going on, and that this is why the economic news has gotten so much press, even though much of it has been fairly mild (outside of the housing price decline).

These types of systemic collapses are not all that rare. They've happened before, and more often that just in the Great Depression. And when they come, they're painful. The last time America had this type of collapse was 70 years ago. Yes, that's right, in the Depression. And I suspect that we may be headed for another one. Hopefully not as severe, but I'm becoming more and more certain that it's going to be more severe than anything we had since 1929.

So what does this all mean for housing prices? They've already declined significantly, but what's so interesting (and scary) is that thus far the decline has been entirely self-induced. The decline in home prices has not resulted from any weakness in the broader economy. People still have their jobs: unemployment remains low. No, the "losses" in home values so far as just the elimination of the bubble excess. The whole problem is that many Americans have relied on those excesses, and can't take their elimination. We haven't even hit the bottom of housing prices in a good economy, and it's scary to think how far they could fall if the economy turns bad, and it looks like it's starting to. If the economy turns bad, and people start to lose their jobs, they'll have to start putting their homes on the market. The increase in supply will drive prices lower, especially when combined with tight credit and high mortgage qualifying standards, which are rapidly becoming the norm rather than the exception. Things will get even worse for homeowners if the Federal Reserve raises interest rates. The run up in value was driven primarily by cheap credit, not wage increases. If credit becomes expensive, sellers will be forced to lower their prices because higher interest rates will make a $300,000 home much more expensive (monthly payment wise) than it was back in the heady days of 2005 and 2006. This will further shatter the construction industry, already reeling from the current home price declines and $4 per gallon gas.

It's not a pretty scenario, and I haven't even mentioned inflation and lack of savings. If even part of this unfolds (and I suspect that it will), I would not be surprised to see home prices fall another 30 percent.

Now, one thing I've learned from watching this whole thing is that government intervention can be a game changer, and that you can't just assume that things will unfold according to the status quo. But it appears that even the massive resources of the federal government might be unable to steer us away from this one--even as willing as they seem to be to try. But you need to be aware that they are going to try (probably unadvisedly) and plan accordingly.

Even though citizens in a democracy should get what they want good and hard (see prior post about H.L. Mencken), they don't very often. But, sometimes they do. It seems that years of government softening the consequences of easy consumer and business credit might be finally coming home to roost. I have a feeling that we're about to get it good and hard and that there's not much anyone, the government included, can do to prevent it.

posted by Curt, on March 21, 2008 05:47 pm

I've mentioned before that I am reading a book titled Devil Take the Hindmost: A History of Financial Speculation. I've even quoted from it in some of my other posts. This week I've been reading the chapter on the speculation leading up to the stock market crash in 1929 (and subsequent depression). Some of what I read was startling in the way it tracked almost exactly what we are seeing today. I'm not the only person who has noticed the parallels. People are writing about it all the time, wondering if we're headed for another Great Depression. Some say that we are, others say that the financial protective structures we've set up during the last 80 years make it almost impossible--in their minds the Great Deperssion was close to a once in history event that involved the coincidence of so many unusual factors that it will never be repeated. They may be right . . . I'm not sure. But what is remarkable is the extent that the last few years parallel the 1920s. Here's some history. Judge for yourself.

The first premise of the "new economics," as it was otherwise called, was that the busines cycle--the periodic undulations of trade first observed in Sir William Petty's successions of "dearth and plenty" back in the seventeenth century--had been effectively abolished by the establishment of the Federal Reserve System in 1913. Before this date, financial crises in the United States had been exacerbated by the absence of a central bank to provide funds to the banking sector durinf periods of instability. The Federal Reserve, with its ability to control itnerest rates and conduct "open market operations"--buying and selling government bonds in order to affect the supply of money available to banks--was hailed in the 1920s as "the remedyto the whole problems of booms, slumps, and panics." As a result, bankers and speculators alike were lulled into a false security which led them to operate irresponsibly, exacerbating the severity of the ensuing crisis (page 192).

Another:

Radios, fridges, cars, and clothes could all be purchased on credit. By the end of the decade, when outstanding installment debt had risen to $6 billion, it was estimated that around an eighth of all retail sales were made on credit. There was a decidedly speculative element in the growth of installment credit: present consumption was being financed with anticipated earnings. Put another way, in their appetite for immediate gratification, the consumers of the 1920s were devouring their future. When the future eventually arrived, they found the cupboard bare. At the time, however, installment purchases were seen as yet another beneficial new era development. Credit and consumption, it was argued, formed a virtuous circle since from the immediate increase in prosperity would come the ability to pay off debt. (page 198)

Some more:

The Federal Reserve in Washington--the institution that had supposedly abolished panics--had inadvertently ignited the stock market boom by lowering interest rates in 1925. This policy was intended to accommodate the Bank of England, which was suffering from an outflow of gold after a disastrous return to the gold standard at the prewar exchange rate. In the summer of 1927, the Fed bowed once more to British demands (backed by the French and Germans) and lowered the discount rate to a record low of 3 1/2 percent. Faced with the growth of speculation, the Fed changed tack and from February 1928 successively raised the discount rate until it reached 6 percent in August 1929. Yet the profits from buying shares on margin were simply too enticing. As long as the market continued rising, speculators were prepared to pay more for their margin loans. While interest rates remained too low to restrain speculation, they became too high for the economy as a whole (or what in the nineteenth century used to be called "legitimate commerce").

This sounds familiar to those of us who watched the market this last week:

In the face of minor stock market panics--in June and December 1928 and later in March 1929--the bull forces succeeded in regrouping. They came out stronger for their trials, until the point was reached when speculators became deaf to warnings they did not wish to hear and developed a belief in their own invincibility. Instead of reasoning, they thrived on countless rumors of fabulous wealth gained in the stock market by valets, chauffeurs, cattlemen, actresses, farmers' wives, and so on. In Only Yesterday, Frederick Lewis Allen described the trance into which the average American had fallen by the summer of 1929:

He visioned an America set free from poverty and toil. He saw a magical order built on the new science and the new prosperity: roads swarming with millions upon millions of automobiles, airplanes darkening the skies, lines of high-tension wire carrying from hilltop to hilltop the power to give life to a thousand labor-saving machines, skyscrapers thrusting above one-time villages, vast cities rising in great geometrical masses of stone and concrete and roaring with perfectly mechanized traffic--and smartly dressed men and women spending, spending with the money they had won by being far-sighted enough to foresee, way back in 1929, what was going to happen. (page 213)

And, finally, a long but good one:

Although stocks continued to slide until the middle of November, Hoover's administration acted promptly to mitigate the fallout from the Crash. The President's public pronouncements were consistently upbeat. He convened business leaders and urged them to maintain wages in order to sustain demand; private and public organizations were asked to bring forward their construction plans; and Treasury Secretary Mellon announced a small tax cut in November. The banking authorities also acted speedily. On 31 October, the Federal Reserve reduced the discount rate to 5 percent (followed by a further reduction of half a percent two weeks later). The New York Federal Reserve Bank oversaw a massive shift in the call loan market, as outstanding margin loans dropped by 50 percent between September and November. Foreign and corporate lenders continued to withdraw their funds from the call loan market, and were replaced by the New York banks which maintained low rates on loans and reduced margin requirements to 25 percent. There were no significant banking or brokerage failures in the immediate aftermath of the Crash, apart from the Industrial Bank of Flint, Michigan, which was forced to close its doors after it was discovered that a cabal of employees had stolen $3.5 million and lost it in the stock market. American corporations also did their best to steady nerves. The day after Black Tuesday, U.S. Steel and several other companies announced increased dividends. Samuel Rosenwald of Sears, Roebuck and Samuel Insull declared they would guarantee their employees' margin accounts. When General Motors announced an extra dividend on 14 November, the news was greeted jubilantly and the Dow Jones stepped off its low of 198 and rose by nearly 25 percent over the next few days.

Optimism was quick to resurface. On the day the market turned, Bernard Baruch cabled Churchill to inform him that the financial crisis was over; although this was of little comfort to the future prime minister, who lost more than L10,000--roughly L300,000 at today's values--in the Crash and was obliged to live frugally for the next few years. Baruch's was a conventional opinion shared by many of the smaller market players who believed the Crash presented them with yet another buying opportunity. The news was mostly positive. Turnover in the stock market was lively at five to six million shares a day; many corporations announced record profits for the previous year; and mergers in banking and utilities continued, as did the property boom. People took comfort in the fact that the major banks appeared well-capitalized. In New York, J.J. Raskob continued with his plans for the hundred-story Empire State Building, which he described as a symbol for "a land which reached for the sky with its feet on the ground." In his ambition to build the world's tallest building Raskob faced competition his fellow speculator, Walker Chrysler, who was building his own 1,146 foot high skyscraper. Meanwhile, William Crapo Durrant busied himself with new stock ppols. In March 1930, President HOover announced that "the worst effects of the crash upon employment will have passed during the next sixty days." The following month the Dow Jones broke through the 300 barrier, up nearly 50 percent from its post-Crash low.

Yet the "sucker's rally," as it was later called, came to an end in the spring of 1930 and the market resumed its downward course until the summer of 1932, when the Dow reached a low of 41.88 on a turnover of under 400,000 shares. In the intervening period, the country's gross national product had fallen by 60 percent from its 1929 level, and unemployment had risen to twelve and a half million. Over a third of the nonagricultural workforce was unemployed.

As the nation sank into depression, the apotheosis of the businessman came to an end (pages 217-219).

Some remarkable parallel's, huh? I'm not sure what will happen this time. I doubt it will be a 60 percent decline in GNP . . . but who knows? It's an uncertain time, and it seems to me as though it's time to go back to the basic, certain principles as much as possible (if you ever left them).

posted by Curt, on February 21, 2008 07:52 pm

This is a day late and probably covered at length by many others, but I thought I'd weigh in. I woke up yesterday and loaded up my news sites as usual. Lo and behold, there, as a secondary/tertiary headline was the news that Castro had stepped down (or chosen not to seek reelection or whatever) as President of Cuba. I thought to myself how times had changed over the last ten and twenty years. This would have been major, week-long news back when I was still in public schools. Even before 9-11 it would have been major news. But yesterday, it was second-tier news.

It all just reinforced to me how the times have changed. This is a much different world than I grew up in, for better and for worse. I actually feel a bit of nostalgia for the days when the end of Castro's rule would have been a major milestone. There's something familiar about that kind of world to me and something non-familiar about the world as it actually was yesterday, when nobody but people in some areas of Miami really cared.

But at the same time this makes me a little nostalgic, it also makes me hopeful. If we can come to a point in this country where the ending of Castro's rule doesn't even make headlines, we can reach a point where even what happens to Osama bin Laden isn't that big of news. Just as the Cold War didn't last forever, neither will the War on Terror. I firmly believe that I will not feel afraid to fly on planes every time I travel for the rest of my life. I have hope that we'll pass the "Clash of Civilizations" just like we passed the great "Clash of Ideology" that many thought would never end.

This second thing this headline reinforced to me was my tendency to always want to live in the past. I hope to have at least 60 more good years of life ahead of me. I suppose that, as time goes by, I'll become more nostalgic and even less excited about the changes. Can you imagine me when I'm 90? I'm not sure I want to. But, as I think about it a little more, perhaps all this has something to do with the gradual turning of hearts of children to fathers. I've thought about that a little lately, and am pretty sure that's the case. Maybe I'll be able to get excited about genealogy work after all!

posted by Curt, on February 18, 2008 10:28 am

When I've had a spare moment lately, I've been reading a book on the history of financial speculation titled The Devil Take the Hindmost. It starts with the Tulip Mania in seventeenth century Holland, and talks about all the major speculative events up to the dot com bubble of the 1990s. I just finished reading about the railway speculation in 1840s England. I found some quotes from newspapers of the time that I thought pretty accurately described the economic attitudes of the last few years. Here are some of them:

There is not a single dabbler in scrip who does not steadfastly believe--first, that a crash sooner or later is inevitable; and secondly, that he himself will escape it. When the luck turns, and the crack play is sauve qui peut, or devil take the hindmost, no one fancies that the last mail train from Panic station will leave him behind. In this, as in other respects, "Men deem all men mortal but themselves."

And another:

It is only the play of children, trying to lift one another in the air at the same time . . . It is the simpler part of the public which is deceived.

One of the other things that was interesting about the chapter on railway speculation was that the author noted that it took "nearly two years for the full impact of the

And finally, ending with a quotation from none other than Bill Gates:

Gold rushes tend to encourage impetuous investments. A few will pay off, but when the frenzy is behind us, we will look back increduously at the weckage of failed ventures and wonder, "Who funded those companies? What was going on in their minds? Was that just mania at work?"

That seems to be just what people are saying right now.

Anyway, for anyone interested, I recommend Devil Take the Hindmost. If you have the inclination, buy it from Amazon. As always, if you use the link below, I get a referral fee :)

posted by Curt Bentley, on October 15, 2007 07:58 pm

Interesting story from Fox News -- the first of the Baby Boom generation filed for social security. I must admit to being a little taken aback . . . I had always thought my dad was part of the baby boom generation (even though I consciously knew he was not, since he was born in '42), and he has been retired for four years now. The fisrt of the baby boomers will turn 61 sometime this year. The youngest of the generation (born in '69, I believe) will be 38. So, for the next 23 years, they'll be beginning to retire. The floodgates are about to open.

While just about everyone agrees that social security is "broken," no one apparently can agree on how to fix it. The real question is what that means for people like me, part of the next generation. I really don't know, and to be honest with you, haven't thought about it much. I don't think I've contributed much to social security (given that I've been in school all my adult life). The only time I think about it is when it's in the news or when I get the informational letter every year around tax time.

It seems to me the most prudent course of action for individuals like me is to assume that social security will not be there. For people in their thirties, that's a viable option. We have enough time that, if we take retirement seriously, we'll be able to get along without social security . . . at least, that's what I think. I'm not planning to rely on it at all. The people who are really in a bind are the people at the tail end of the baby boom generation. Their in their early forties to early fifties. They may have planned on social security to finance a substantial portion of their retired life. It seems to me that we only really have to try and fix social security for those individuals . . . the rest of us can probably get along without it. Of course, such a decision flies in the face of the very principle that social security is "legitimated" on: that when you're young you pay in and when you're old you draw out. This makes it very easy for people opposing what seems like the commonsense solution--all they have to do is use this contradiction to get people really riled up politically. So long as they can do that, it will take a real emergency before the people will be united enough over the social security problem to prevent politicians from using social security as a divisive issue to generate political capital.

So what do I think this all means? I'm really not sure, but I suspect it means that we won't see social security reform until the system is pretty much bankrupt . . . likely right about the time that the middle of the baby generation retires (maybe ten years from now). Then we'll see just how reliant people are on social security. If they're not all that reliant, then the system might just go relatively quietly into the good night. If not, it should be an entertaining political battle. But, I'm planning on the death of social security within the next 25 years. If it lives, I'll get something of a bonus. But if not, I plan to take care of myself, by myself.